A Word of Caution to Cryptocurrency Investors

(Originally posted 01/23/2018)

If you invest in bitcoin or other cryptocurrency vehicles in the United States, you should know that in 2014 the IRS ruled that, for tax purposes, these investments need to be treated as property, not currency.

That means, if you’re a bitcoin investor and have cashed in your gains or made purchases using cryptocurrency, the IRS expects to receive its fair share.

In many cases. since your cryptocurrency exchange did not issue a Form 1099, you may have previously overlooked declaring your transactions on your tax returns.

In fact, for the years, 2013-2015 fewer than 1,000 taxpayers a year claimed bitcoin gains. During those years, cryptocurrency value soared from the $13 range to about $430. With bitcoin opening today at $10,772.15, cryptocurrency now has the full attention of the IRS.

The IRS won a court ruling on November 29th, 2017, when a U.S. District Court judge in California ordered Coinbase, a popular platform for buying and selling bitcoin and other cryptocurrencies, to turn over identifying information on accounts worth at least $20,000 from the 2013 to 2015 period.

(As of this writing, it’s unclear whether the exchange will comply or contest the ruling.)

Bottom line, although many investors may have assumed bitcoin investments were anonymous transactions, that information is available. And the IRS has already gone to court to obtain it.

Not reporting your gains can be viewed as tax evasion by the government.

So how do you determine what you owe?

You need to track the cost basis of each transaction, your holding period, and the sale price.

If you held your cryptocurrency for one year or less and made money on it, it’s considered a short-term capital gain and taxed as ordinary income. Depending on your tax bracket for 2017, that could range from a tax rate of 10 percent to 39.6 percent.

Any bitcoin you sold or spent after owning it for more than one year is taxed as a long-term capital gain. Taxable rates on those gains range from 0 percent to 20 percent, with higher-income households paying the highest rate.

NOTE: The accountants at Brown Brown & Associates are very familiar with bitcoin investing and its tax ramifications.